Rich Privorotsky believes that to break the current US debt-stock vicious cycle, the only paths are to ‘cut spending, financial repression, and intervene in the foreign exchange market,’ but the possibility of achieving any of these is slim. As a result, funds are starting to flow into gold and cryptocurrencies, indicating that the market may have already incorporated these structural pressures into pricing.
What is the way out of the US debt-stock vicious cycle? Recently, due to increasing concerns about the US fiscal outlook, the market situation has taken a sharp turn for the worse after the poor auction of the 20-year Treasury bond on Wednesday. Deutsche Bank analyst George Saravelos points out that there are currently two solutions: one is to ‘significantly revise’ Trump’s massive tax cut bill and implement stricter fiscal policies (meaning higher taxes, which could even lead to a recession); the other is to devalue the dollar, increasing the attractiveness of US debt to foreign buyers. Goldman Sachs trading department head Rich Privorotsky further stated that the surge in US Treasury yields has put pressure on overall risk assets, and this crisis may eventually evolve into a devaluation of the dollar and the rise of non-traditional assets (such as gold, cryptocurrencies). Privorotsky has previously argued that the relationship between yields and the stock market is non-linear – once the former exceeds a certain threshold, it will start to have a substantial impact on the latter. Breaking the vicious cycle: the rise of gold, cryptocurrencies, and non-US stocks. Privorotsky believes that the market may fall into a ‘reflexive cycle’ around the fiscal budget. If fiscal spending levels continue and the US economy remains resilient, pressure will focus on two key ‘pressure valves’: long-term interest rates (not directly controlled by the Federal Reserve) and the dollar. In Privorotsky’s view, there are three paths to the solution: massive cuts in government spending (almost impossible politically), financial repression, that is, managing the yield curve through monetary policy (similar to Japan, but it would undermine the independence of the Federal Reserve), or the Federal Reserve or the Treasury intervenes in the dollar (which could trigger a currency war). These options are not easy, nor do they support a strong dollar, which explains why funds are pouring into two types of non-traditional assets: gold and cryptocurrencies. Privorotsky further points out that the excellent performance of gold, cryptocurrencies, and non-US stock markets will send a signal that the market may have already started to price these structural pressures, and the path to the third step (non-US stock markets) is being outlined in real-time. Tariffs are bearish on the fundamentals, and the prospects for US stocks are worrying. So, what does this mean for the US stock market? Privorotsky suggests taking a step back to look at the issue.He believes that in recent weeks, it has become evident that there is a significant amount of technical demand driving the market, unrelated to price. Of course, the net amount is not high, and this compression of volatility, without an increase in volatility, will drive stock demand. Considering that a substantial portion of the high tariff rates will indirectly be paid by American consumers, Privorotsky thinks that the risk-reward ratio in the stock market looks poor: ‘Tariffs are akin to a new form of taxation.
Interest rates are higher, not lower… It’s hard to argue that fundamental growth will benefit, and most of the temporary demand front-loading has now ended. Volatility has been reset and has room to rise.’ Risk warnings and disclaimers: The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account individual users’ specific investment objectives, financial conditions, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their particular circumstances. Investment decisions based on this article are at one’s own risk.